U.S. dioceses' bankruptcy cases could have a major impact on the issue of separation of church and state, says Bill Gray in Dow Jones

The Chapter 11 cases of two Roman Catholic dioceses are sparking a bitter debate that may have lasting First Amendment implications and a major impact on church–state separation jurisprudence.

In resolving sex-abuse lawsuits in 2004, the Archdiocese of Portland, Oregon and the Diocese of Spokane, Washington filed for Chapter 11 protection. But in August 2005, a bankruptcy court ruled that the Spokane parish property can be sold to repay abuse victims in the bankruptcy. Then on Friday, a bankruptcy court deemed that the Portland archdiocese, not its parishes, owns the US$500 million parish property.

The dioceses both argue that the Catholic Church's internal law, canon law, bars them from using assets of the parishes, which are held in trust, to settle the sex abuse claims, and that the courts are required to respect the churches' religious freedom to organize internally.

Past court rulings have indeed given churches the right, under the First Amendment, to use canon law to organize their civil property relationships. Many Catholic dioceses in the United States are in fact organized as corporations sole, meaning that as the sole owner of the corporation, the bishop or archbishop holds the assets of the individual parishes in his name.

Lawyers for the sex-abuse victims, however, say there's no clear legal—or practical—separation between the parishes and the diocese: they are not are not independent legal entities. Abuse victims iterate that a religious organization's external relationships to the rest of society can only be governed by civil law.

Some bankruptcy experts agree, arguing that the very act of filing for protection under federal bankruptcy law puts a religious organization's autonomy in jeopardy. "When a regulating group seeks the protection of a civil authority, it, in a sense, loses some of its self regulating rights," says Bill Gray. "In order to take advantage of that shield, you also have to be prepared for the sword of bankruptcy."

Meanwhile, a Tucson, Arizona diocese avoided the issue earlier this year in exiting Chapter 11 protection last year after reaching a US$22.3 million settlement with abuse victims.

A resolution that sidesteps the ownership issue is not likely in either Portland or Spokane, says Bill. "I certainly think this is something that is very likely to wind itself up the appellate chain. "I think on the issue of separation of church and state, it could have a major impact."